Risk Management In UK Banking - The Role Of Derivatives Hedging In Particular

Magisterarbeit , 2010 , 53 Seiten , Note: 2,0

VWL - Finanzwissenschaft

Risk management has been pivotal banking activity, particularly for the last 20 years. Volatile
economic conditions and ever‐growing competitive forces have compressed profit margins and
forced UK banks to look up to sophisticated and more comprehensive methods of identifying optimal
risk‐return positions. Advanced technology and global business focus has presented opportunities to
utilize comprehensive quantitative techniques to contain and manage risk exposure. Technology has
played crucial role in establishing and dispersing electronic trading platforms giving access to equity
and derivatives hence reshaping capital acquisition and risk management frameworks. The topic of
risk management has been even more contextual in times of severe economic/financial crisis.
Analysts have not only been critical of banks’ uncollateralized lending but also of their excessive
trading with derivative instruments. Assuming that no arbitrage opportunities exist, the question
remains as to whether banks attempt to hedge their risk exposure or purely speculate on the
direction of price movements. In this context, central task of this dissertation is to examine the role
derivative instruments play in the UK banking system through aggregately assessing risk position of
largest UK banks relative to aggregate trading volumes. Empirical analysis is conducted utilizing a
two‐stage SUR technique. Results from first stage of empirical analysis confirm that risk premium on
banks’ equity securities is strongly related to market risk premium. More importantly, findings
illustrate that exchange rate exposure of UK banks has more significant impact on stock returns
compared to interest rate risk exposure. Second stage of the analysis fails to provide comprehensive
conclusion due and produces controversial results. Nevertheless, exchange rate derivatives are found
to have impact on exchange rate risk albeit only marginally

Inhaltsverzeichnis

• Chapter I: Introduction
• Chapter II: UK Financial system
  • 2.1. UK Financial Services and Banking at a Glance
  • 2.2. Banks
    • 2.2.1. Retail Banks
    • 2.2.2. Wholesale banks
    • 2.2.3. International Banks
  • 2.3. Building Societies
  • 2.4. Other Financial Institutions
    • 2.4.1 Pension funds
    • 2.4.2 Insurance funds
    • 2.4.3. Finance houses
    • 2.4.4. Unit trusts
    • 2.4.5. Investment Funds
  • 2.5. Regulatory Factors
    • 2.5.1. Capital Adequacy Framework
    • 2.5.2. Non-interest Bearing Reserves at Central Bank
• Chapter III: Risk Management in UK Banking
  • 3.1. Overview
  • 3.2. Foreign Exchange and Interest Rate Risk
    • 3.2.1. Foreign Exchange Risk
    • 3.2.2. Interest Rate Risk
    • 3.2.3. Derivative instruments
      • 3.2.3.1. Swaps
      • 3.2.3.2. Options
      • 3.2.3.3. Forwards and Futures
  • 3.3. Credit risk
  • 3.4. Market Risk
• Chapter IV: Literature Review
• Chapter V: Empirical Analysis
  • 5.1. Theoretical Model
  • 5.2. Data Characteristics
  • 5.3. Empirical Results
    • 5.3.1. First Stage
    • 5.3.2. Second Stage
• Chapter VI: Conclusion
• Bibliography

Zielsetzung und Themenschwerpunkte

This dissertation aims to examine the role of derivative instruments in the UK banking system by assessing the risk position of the largest UK banks relative to aggregate trading volumes. The study focuses on the impact of derivatives hedging on risk management practices within the UK banking sector, particularly in relation to foreign exchange and interest rate risk.

• The role of derivatives hedging in managing risk exposure in UK banking
• The relationship between derivative trading and bank risk profiles
• The impact of exchange rate and interest rate risk on bank stock returns
• The effectiveness of derivatives hedging strategies in mitigating risk
• The regulatory environment surrounding derivatives trading in the UK banking sector

Zusammenfassung der Kapitel

Chapter I provides an introduction to the topic of risk management in UK banking, highlighting the importance of derivatives hedging in mitigating risk exposure. Chapter II presents an overview of the UK financial system, including a detailed analysis of the banking sector, building societies, and other financial institutions. Chapter III delves into the concept of risk management in UK banking, focusing on foreign exchange and interest rate risk, and the role of derivative instruments in managing these risks. Chapter IV reviews existing literature on the topic of risk management in banking, examining both banking and non-banking institutions. Chapter V presents the empirical analysis, which utilizes a two-stage SUR technique to assess the relationship between derivative trading and bank risk profiles. The chapter examines the impact of exchange rate and interest rate risk on bank stock returns and the effectiveness of derivatives hedging strategies in mitigating risk.

Schlüsselwörter

The key themes and keywords of this dissertation include risk management, derivatives hedging, UK banking, foreign exchange risk, interest rate risk, empirical analysis, SUR technique, bank stock returns, and regulatory environment. The dissertation explores the role of derivatives in managing risk exposure within the UK banking sector, analyzing the impact of these instruments on bank risk profiles and stock returns. The study also examines the regulatory framework surrounding derivatives trading in the UK banking sector.

• Hochschule: University of Portsmouth
• Note: 2,0
• Autor: Dimitar Vasilev (Autor:in)
• Erscheinungsjahr: 2010
• Seiten: 53
• Katalognummer: V180772
• ISBN (eBook): 9783656035725
• ISBN (Buch): 9783656035572
• Sprache: Englisch
• Schlagworte: risk, management, banking, role, derivatives, hedging, particular